The Plane Truth Behind Boeing’s $18B Score
by Susan J. Aluise | November 15, 2011 7:00 am
After a subdued showing at the Paris Air Show in June, Boeing (NYSE:BA) took the Dubai Air Show by storm on Sunday, inking the largest aircraft deal, with Emirates Airline, in Boeing history. The $18 billion deal includes delivery of 50 extended-range 777-300 jets outfitted with GE Aviation’s (NYSE:GE) GE-90 engines. Boeing expects to deliver the jets to Emirates next March.
While the size of the Emirates order was unexpected, it’s no surprise that the airline chose the 777 — Boeing has sold more than 130 of the twin-engine aircraft so far this year. The Chicago-based defense/aerospace giant is rising on the news — shares were up by more than 2% by midday Monday.
Despite the company’s exposure to the defense market, its commercial aircraft business is a source of strength. So are its fundamentals. At a little over $68, BA is trading about 22% above its 52-week low of $56.01 in August. With a market cap of $50.6 billion, BA has a PEG ratio of 0.95, meaning it could be slightly undervalued. BA has a current dividend yield of 2.5%. Boeing’s one-year return is about 10.5%.
But in the aviation sector, there are no guarantees of a turbulence-free flight. So here are three reasons to hold BA shares and three reasons to fold:
- The A350 Delay. Boeing might not have received the record-setting Emirates deal had it not been for Airbus’ stumble with its new A350-900. Last week, the company said it would postpone delivery of the plane by at least six months, delaying the model’s debut until 2014. Airbus’ revamped A350-1000, billed as the direct competitor to the 777, has been postponed by 18 months.
- The “A340 Killer.” The “Triple-Seven,” as it’s called, may best be remembered as the “A340 Killer,” since Airbus last week announced it would end production of the four-engine jets due to lack of sales. Because the 777’s two engines make the plane more fuel-efficient than the four-engine A340, Airbus hasn’t sold any of the models for nearly two years. Ironically, Emirates had been the launch-customer for the A340 in 2003.
- Strong Middle East Market. Boeing is staking a claim in the Middle East, a market it believes will need more than 2,500 planes — $450 billion in aircraft — by 2030. “The Middle East has seen an unprecedented growth in capacity over the past 10 years and every indication points to a further, significantly large increase over the next 20 years,” said Randy Tinseth, Boeing Commercial Airplanes marketing vice president, said Monday at the Dubai Air Show. “The region’s airlines, with their forward-thinking approach, have become a competitive force globally.” Tinseth forecast that 90% of the Middle East’s new demand will be for single- and twin-aisle aircraft.
- Airbus Wins Back ALAFCO. News broke on Monday that the Kuwait-based Aviation Lease and Finance Company (ALAFCO), which ordered 22 of Boeing’s 787 Dreamliners back in 2007, had cancelled six of the orders. Instead, ALAFCO increased its order for Airbus A320neo jets to 50, up from the 30 it contracted for at the Paris Air Show. It also took options for as many as 30 more of the single-aisle, fuel-efficient jets. Oman Air took over the six 787 orders, which were almost certainly discounted from a list price of nearly $200 million apiece.
- NRLB Suit. “I fly because it releases my mind from the tyranny of petty things,” pilot and author Antoine de Saint-Exupery once said. But sometimes, the tyranny of petty things can make it tough to fly — or build airplanes. The National Labor Relations Board is at war with Boeing over a second 787-assembly plant the company opened in South Carolina in June. The NLRB has filed suit against Boeing, charging that its decision to open a plant in a “right-to-work” state is illegal retaliation against union machinists in Washington State for their numerous strikes. The NRLB demands that Boeing make restitution by adding another assembly line at the union shop and producing more 787s there.
- New Delivery Delays. Just when the industry thought Boeing’s delays were behind it, the manufacturer revealed it was pushing back delivery of the passenger version of the 747-8 to the first quarter of 2012, instead of the fourth quarter of this year. Boeing attributed the slip to flight-testing delays. It also pushed back the debut of its new 787-9 model to 2014, instead of late 2013.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
- BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
- GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
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